CF Bankshares Inc. — 2014 Q1 Form 10-Q
Filing entity: The supplied filing identifies the registrant as Central Federal Corporation, parent of CFBank. Reporting period: three months ended March 31, 2014; financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
CFBank is an Ohio-focused community bank serving consumers and small businesses. It gathers deposits and lends primarily in commercial, commercial real estate, residential mortgage and home-equity markets. Results depend substantially on Ohio economic and real estate conditions.
Financial results and condition
- Earnings: Net loss was $0.214 million, or $0.01 per share, versus a $0.810 million loss, or $0.05 per share, in Q1 2013. No income tax expense or benefit was recorded.
- Interest income and margin: Interest income was $2.203 million, up 28.8%; interest expense was $0.442 million, down 15.8%. Net interest income increased 48.5% to $1.761 million. Net interest margin improved to 3.02% from 2.32%.
- Credit costs and other income: Loan-loss provision declined to $0.020 million from $0.326 million. Noninterest income rose to $0.245 million from $0.133 million. Noninterest expense increased to $2.200 million from $1.803 million.
- Balance sheet: Assets were $258.989 million at March 31, up 1.3% from year-end. Net loans were $208.902 million, up 0.9%; deposits were $215.688 million, up 3.5%. Stockholders’ equity was $22.700 million, down from $22.864 million.
- Credit quality: Nonperforming loans declined to $5.564 million from $5.738 million; the nonperforming-loan ratio was 2.6%, versus 2.7%. Allowance for loan losses was $5.763 million, 2.68% of loans and 103.6% of nonperforming loans. Past-due loans increased to $3.082 million from $2.519 million. No loans were 90 days past due and still accruing.
- Cash flow and liquidity: Operating cash flow was positive $0.041 million; investing cash flow was negative $1.031 million and financing cash flow was positive $3.408 million. Cash and cash equivalents increased $2.418 million to $21.578 million. Management reported $24.614 million in cash, unpledged securities and deposits at other institutions, plus borrowing capacity, for total available liquidity of $62.693 million.
- Debt and capital: FHLB advances were $13.0 million; subordinated debentures were $5.155 million. CFBank’s total risk-based capital ratio was 12.43%, and its Tier 1 leverage ratio was 9.64%. These exceeded the OCC’s continuing minimum requirements of 12% and 8%, respectively.
Material changes versus comparable periods
- The quarterly net loss narrowed by $0.596 million, primarily reflecting higher net interest income, lower loan-loss provision and higher noninterest income; higher operating expenses partly offset these gains.
- Average interest-earning assets increased 14.0%, and management attributed improved net interest income to asset growth and mix, higher average asset yields, and lower funding costs.
- Loan composition shifted: commercial and construction balances increased, while single-family and multifamily residential balances declined. Northpointe mortgage-program loans held fell to $5.0 million from $12.7 million at year-end.
- Special-mention loans declined 19.2% to $2.4 million and substandard loans declined 2.0% to $14.6 million. However, total past-due loans rose 22.3%.
Outlook, risks and unusual items
- Regulatory status: The OCC terminated CFBank’s cease-and-desist order on January 23, 2014, but retained heightened capital requirements and imposed continuing credit-risk and workout commitments. The separate Federal Reserve order governing the holding company remains in effect, including restrictions on dividends, capital distributions and debt activity without prior regulatory approval.
- Funding and parent liquidity: Brokered deposits totaled $18.408 million, with maturities through 2016. The company said available liquid assets were sufficient to cover 2014 maturities. CFBank dividend payments to the parent were unlikely to be approved while the bank was reporting losses. The holding company had $2.1 million in cash.
- Management outlook: No quantified earnings or revenue guidance is provided. Management said the quarter’s results are not necessarily indicative of full-year performance and identified profitability, credit quality, liquidity, capital and regulatory compliance as continuing concerns.
- Credit and market risks: Management cited possible deterioration in borrowers’ performance, cash flows and collateral values; interest-rate and funding sensitivity; potential additional loan-loss provisions; and risks from regulatory examinations. Interest-only commercial lines and home-equity lines were $14.3 million and $13.0 million, respectively.
- Allowance methodology: The bank changed its general-reserve methodology to rely more on its three-year historical loss experience; the change reduced the allowance by $0.250 million. Management considered prior-period impact immaterial.
- Subsequent capital raise: On May 12, 2014, after quarter-end, the company sold $6.750 million of 6.25% non-cumulative convertible perpetual preferred stock and received approximately $6.403 million net. Warrants to purchase 610,000 common shares were also issued, creating potential dilution.
- Controls: Management reported disclosure controls were effective. A material weakness concerning loan-participation accounting identified at year-end was addressed during the quarter through amended agreements and approval procedures.
Important facts for investors to verify
- Whether CFBank can sustain improved net interest margin and reduce operating expenses enough to return to profitability.
- Whether past-due, criticized and classified loans continue to improve, and whether the allowance remains adequate under the revised methodology.
- Compliance with the OCC’s capital requirements and commitments, and the continuing restrictions under the Federal Reserve holding-company order.
- Brokered-deposit maturities, access to borrowing facilities and the holding company’s ability to meet its own obligations without bank dividends.
- The final terms, regulatory treatment and potential dilution from the preferred-stock and warrant issuance; the filing’s stated share-count and offering details should be checked against the related securities filings.